No sign of cooling in hot housing market

The housing boom ignited by the Reserve Bank of Australia’s decision to slash borrowing costs to record lows in 2013 shows no signs of slowing. And there is reason to believe that unless the central bank acts to cool the brewing bubble, valuations will become more stretched by the middle of this year.

The hard numbers that animate the movement in national housing costs are breathtaking, especially relative to incomes.

According to RP Data-Rismark, home values across capital cities rose by 9.8 per cent over the 12 months to December 31, 2013. Wages growth has been less than 3 per cent. In Sydney and Melbourne, dwellings are now 14.5 per cent and 8.5 per cent respectively more expensive than they were in December 2012.

It was the RBA’s decision to ease rates in May and August, which pushed average borrowing costs below their global financial crisis marks and triggered the “boom".

According to RP Data-Rismark, the index supplier that the RBA cites most frequently, home values across Australia’s eight capital cities rose by 9.8 per cent over the 12 months to 31 December 2013.
Photo: Louie Douvis

In the second half of 2013 dwelling prices across the capital cities rose at a 14 per cent annual clip. In Sydney and Melbourne the cost of housing expanded at a 20 per cent and 13 per cent annual rate, respectively, over the same period.

The RBA chose to highlight this striking development in its December minutes. The board noted that “housing prices had increased at an annualised rate of 15 per cent over the past six months".

Several sub-currents underlie Australia’s budding property tsunami. One question is how prices compare with their previous all-time peaks. The last boom ended in late 2010 when the national median dwelling price – across all regions and property types – touched $425,000. Today it is 10 per cent dearer at $468,000, according to RP Data.

Capital city strength

Related Quotes

Company Profile

This story is accentuated in the capitals.If one strips out the cheaper non-metro regions, the national median across houses and apartments is $540,000, which is 13 per cent above its 2010 high.

In Sydney and Melbourne, dwelling prices maxed out at $538,000 and $491,000 respectively, in 2010. In December 2013, the Sydney median hit a record $655,250, while the typical Melbourne home is $563,000.

Another revelation is that the recovery has been faster in more expensive markets. In 2009 and 2010 first-time buyers led the charge and luxury suburbs lagged. But when RP Data divides its index into cheap homes, mid-priced properties and the most expensive dwellings, it finds the luxury market is now outperforming.

In the final six months of 2013, the dearest 20 per cent of homes ranked by price realised capital gains of 6.7 per cent. In contrast, the cheapest 20 per cent of properties registered a 5.5 per cent increase. This dynamic gels with the comparatively subdued first-time buyer participation evidenced in the home loan data.

AFR
AFR

Combined with a recent surge in investor borrowing and the enormous untapped potential for leveraged demand in the $500 billion self-managed super fund sector, this portends a speculative flavour to the burgeoning boom.

A final takeaway from the December results is that Australia’s housing boom has shown no signs of decelerating. RP Data found that national capital gains in December were a stonking 1.4 per cent, with growth distributed across Sydney, Melbourne, Brisbane and Perth.

The question on everyone’s lips is, how long can this continue? If the RBA does not normalise the price of money in 2014, or introduce macro-prudential tools to constrain credit creation, it is likely the best borrowing rates in history will give us more of the same until valuations become unsustainable.

If one assumes that house price growth slows from the 14 per cent pace over the last half of 2013 to, say, 10 per cent, and that household incomes expand at their current 3 per cent pace, the ratio of housing costs to incomes will breach its previous peak by June this year. That is, Australian real estate will be more expensive than it has ever been before, relative to incomes.